STUDY UNIT THREE MACROECONOMICS

Question 1

For a given level of tax collections, prices, and interest rates, a decrease in governmental purchases will result in a(n)
A Increase in aggregate demand.
B Increase in aggregate supply.
C Decrease in aggregate supply.
D Decrease in aggregate demand.

Answer 1

D Decrease in aggregate demand.
This answer is correct.
Aggregate demand consists of consumption, investment, governmental spending, and net exports. A decrease in government purchases will therefore decrease aggregate demand.

Question 2

During a recession, the goal of government fiscal policy is to raise equilibrium output. An appropriate governmental action in this situation is to
A Increase government spending.
B Decrease government spending.
C Increase government taxes.
D Increase government taxes and decrease government spending by equal amounts

Answer 2

A Increase government spending.
This answer is correct.
According to Keynesian economics, the sum of personal after-tax consumption expenditures, gross investment, net exports, and government spending equals gross domestic product (GDP) at equilibrium. At this output level, aggregate expenditures equal real aggregate domestic output. Thus, an increase in government spending, with other factors held constant, increases equilibrium GDP, that is, equilibrium output.

Question 3

During which of the following periods will prices generally increase the fastest?
A Hyperinflation.
B Inflation.
C Deflation.
D Recession.

Answer 3

A Hyperinflation.
This answer is correct.
Inflation is a sustained increase in the general level of prices. In periods of hyperinflation, prices are increasing at a very high rate.

Question 4

Economists identify two basic types of inflation.

True	
False

Answer 4

True
Your answer is correct.
There are two basic types of inflation, cost-push inflation and demand-pull inflation.

Question 5

Each of the following is a limitation of GDP’s usefulness as a measure of a nation’s prosperity except

A. Increases in GDP often involve environmental damage.
B. GDP leaves out intermediate goods.
C. Cash-only economic activity is not counted in GDP.
D. No practical means are available to compare real GDP from different time periods.

Answer 5

D. No practical means are available to compare real GDP from different time periods.
Answer (D) is correct.
Comparing GDP over time is a challenge, but it is by no means insurmountable. Various price indexes, such as the Bureau of Labor Statistics’ Consumer Price Index and the GDP deflator, are suitable for converting nominal GDP amounts from different years to comparable amounts in terms of a base year.
(3.2.17)

Question 6

The controller of Gray, Inc., has decided to use ratio analysis to analyze business cycles for the past 2 years in an effort to identify seasonal patterns. Which of the following formulas should be used to compute percentage changes for account balances for Year 1 to Year 2?

A. (Prior balance – Current balance) ÷ Current balance
B. (Current balance – Prior balance) ÷ Current balance
C. (Prior balance – Current balance) ÷ Prior balance
D. (Current balance – Prior balance) ÷ Prior balance

Answer 6

Answer (D) is correct.
This formula divides the amount of the change by the balance for the earlier period; i.e., the resulting percentage represents the size of the change with respect to the earlier balance
(3.5.41)

Question 7

In national income terms, aggregate demand is

A. Demand that is needed if a country’s economy is to operate at optimum level and the level of investment is to be raised.
B. Demand for money by the community in a period of full employment.
C. Total expenditure on consumer goods and investment, including government and foreign expenditure, during a given period.
D. Total expenditure on capital goods by entrepreneurs during a period of full employment.

Answer 7

C. Total expenditure on consumer goods and investment, including government and foreign expenditure, during a given period.
Answer (C) is correct.
Aggregate demand reflects the real domestic output at each possible price level. The determinants of aggregate demand are changes in consumer spending, investment, government spending, and net exports.
(3.4.26)

Question 8

During which of the following periods will prices generally increase the fastest?
A Hyperinflation.
B Inflation.
C Deflation.
D Recession.

Answer 8

A Hyperinflation.
This answer is correct.
Inflation is a sustained increase in the general level of prices. In periods of hyperinflation, prices are increasing at a very high rate.

Question 9

During a recession, the goal of government fiscal policy is to raise equilibrium output. An appropriate governmental action in this situation is to
A Increase government spending.
B Decrease government spending.
C Increase government taxes.
D Increase government taxes and decrease government spending by equal amounts.

Answer 9

A Increase government spending.
This answer is correct.
According to Keynesian economics, the sum of personal after-tax consumption expenditures, gross investment, net exports, and government spending equals gross domestic product (GDP) at equilibrium. At this output level, aggregate expenditures equal real aggregate domestic output. Thus, an increase in government spending, with other factors held constant, increases equilibrium GDP, that is, equilibrium output.

Question 10

For a given level of tax collections, prices, and interest rates, a decrease in governmental purchases will result in a(n)
A Increase in aggregate demand.
B Increase in aggregate supply.
C Decrease in aggregate supply.
D Decrease in aggregate demand.

Answer 10

D Decrease in aggregate demand.
This answer is correct.
Aggregate demand consists of consumption, investment, governmental spending, and net exports. A decrease in government purchases will therefore decrease aggregate demand.

Question 11

Under the income approach, gross domestic product (GDP) is measured as
A Depreciation charges and indirect business taxes + Wages + Rents + Interest + Profits – Net American income earned abroad.
B Depreciation charges and indirect business taxes + Wages + Rents – Interest + Profits.
C Wages + Rents + Interest – Profits + Net American income earned abroad.
D Wages + Rents + Interest + Profits.

Answer 11

A Depreciation charges and indirect business taxes + Wages + Rents + Interest + Profits – Net American income earned abroad.

This answer is correct.
GDP is the total value of goods and services produced within the boundaries of the United States. Under the income approach, GDP equals all income derived from the production of the year’s output, with an adjustment for net U.S. income earned abroad. Accordingly, GDP may be measured as the sum of national income (consisting of wages, rents, interest, proprietors’ income, and undistributed corporate profits), indirect business taxes, net foreign-factor income (the excess of income generated in the U.S. from foreign-owned resources over income generated in other countries from U.S.-owned resource), and the amount of capital consumed.
View Subunit 3.2 Outline

Question 12

he following information is available for economic activity for Year 1:

In billions

Financial transactions $60
Second-hand sales 50
Consumption by households 40
Investment by businesses 30
Government purchases of goods and services 20
Net exports 10

What amount is the gross domestic product for Year 1?
A $90 billion.
B $100 billion.
C $210 billion.
D $160 billion.

Answer 12

B $100 billion.

This answer is correct.
Gross domestic product (GDP) is the principal measure of national economic performance. Under the expenditures approach, GDP is the sum of consumer spending, investment spending, government spending, and net exports: $40 consumption by households + $30 investment by businesses + $20 government purchases + $10 net exports = $100 GDP (in billions).
View Subunit 3.1 Outline

Question 13

Which of the following would indicate that the economy is in an expansionary phase?

A. The economy’s resources are underused.
B. Businesses increase capital investment.
C. Potential national income will exceed actual national income.
D. Building up of inventories is in excess of consumer demand.

Answer 13

B. Businesses increase capital investment.
Answer (B) is correct.
Expansionary policies employed by the government stimulate aggregate demand by (1) cutting taxes, which puts more money in the hands of consumers, and (2) increasing government spending, which generates demand for goods and services from the private sector. Therefore, during the expansionary phase, the consumers’ and government’s demand for products is increased and the economy is expanding. An increase in demand for products increases capital investments by businesses.
(3.7.69)

Question 14

For a given level of tax collections, prices, and interest rates, a decrease in governmental purchases will result in a(n)

A. Decrease in aggregate supply.
B. Increase in aggregate supply.
C. Increase in aggregate demand.
D. Decrease in aggregate demand.

Answer 14

D. Decrease in aggregate demand.
Answer (D) is correct.
Aggregate demand consists of consumption, investment, governmental spending, and net exports. A decrease in government purchases will therefore decrease aggregate demand
(3.1.4)

Question 15

Chihuahua Bank is willing to lend a business firm $1 million at an annual real interest rate of 6%. What is the nominal rate Chihuahua Bank will charge the firm if the rate of inflation is anticipated to be 2%?

A. 6%
B. 4%
C. 2%
D. 8%

Answer 15

D. 8%
Answer (D) is correct.
If Chihuahua Bank requires a real return of 6%, a 2% inflation rate will result in an 8% nominal rate.
(3.5.48)

Question 16

Which of the following is correct regarding the consumer price index (CPI) for measuring the estimated decrease in a company’s buying power?

A. The CPI measures what consumers will pay for items.
B. The products a company buys should differ from what a consumer buys.
C. The CPI is skewed by foreign currency translations.
D. The CPI is measured only once every 10 years.

Answer 16

B. The products a company buys should differ from what a consumer buys.
Answer (B) is correct.
For a company to maintain its margins in times of rising prices, it must purchase lower-priced, if not lower-quality, products. The consumer may continue to buy the higher-priced products that (s)he is used to purchasing.
(3.5.36)

Question 17

A hospital is comparing last year’s emergency rescue services expenditures to those from 10 years ago. Last year’s expenditures were $100,500. Ten years ago, the expenditures were $72,800. The CPI for last year is 168.5, as compared to 10 years ago when it was 121.3. After adjusting for inflation, what percentage change occurred in expenditures for emergency rescue services?

A. 0.6% decrease.
B. 13.8% increase.
C. 38.0% increase.
D. 18.1% decrease.

Answer 17

A. 0.6% decrease.
Answer (A) is correct.
To compare monetary amounts in constant dollars, both amounts must first be deflated using the appropriate price index. Last year’s expenditures in constant dollars equal $59,643.52 ($100,500 ÷ 1.685), and those from 10 years ago equal $60,016.49 ($72,800 ÷ 1.213), for a net decrease of $372.57 ($59,643.52 - $60,016.49). Thus, after adjusting for inflation, expenditures decreased by 0.6% ($372.57 ÷ $60,016.49).

Question 18

The discount rate of the Federal Reserve System is

A. The rate that commercial banks charge for loans granted to the public.
B. The rate that the central bank charges for loans granted to commercial banks.
C. The ratio of excess reserves to legal reserves that are deposited in the central bank.
D. The specified percentage of a commercial bank’s deposit liabilities that must be deposited in the central bank.

Answer 18

B. The rate that the central bank charges for loans granted to commercial banks.
Answer (B) is correct.
The discount rate is the amount the central bank charges when making loans to member banks.
(3.9.92)

Question 19

The Federal Reserve System’s reserve ratio is the
A. Ratio of excess reserves to legal reserves that are deposited in the central bank.
B. Rate that the central bank charges for loans granted to commercial banks.
C. Specified percentage of a commercial bank’s demand deposits to total liabilities.
D. Specified percentage of a commercial bank’s deposit liabilities that must be deposited in the central bank or kept on hand.

Answer 19

D. Specified percentage of a commercial bank’s deposit liabilities that must be deposited in the central bank or kept on hand.
Answer (D) is correct.
The reserve ratio is the percentage of the customer deposits that banks must keep on hand or deposit with the Fed. These deposits are required by law to ensure the soundness of the bank and also serve as a tool for monetary policy; i.e., changes in the reserve ratio affect the money supply.
(3.8.76)

Question 20

A major problem arising from the use of fiscal policy to help stimulate an economy is that there

A. Are too few fiscal goals that have wide public support.
B. May be an expansionary and, therefore, inflationary bias to such policies.
C. Is a balanced budget that promotes cyclical fluctuations.
D. Is too short a lag between recognizing an economic problem and implementing a cure.

Answer 20

B. May be an expansionary and, therefore, inflationary bias to such policies.
Answer (B) is correct.
An increase in government spending or a tax reduction to stimulate the economy will increase the amount of money available for spending and will lead to increased demand for goods and services. If the increased demand is not offset by increased productivity, the fiscal policy will have an inflationary effect.
(3.7.66)

Question 21

Disposable income is equal to

A. Income after taxes have been removed.
B. Earned income minus unearned income.
C. All earned income received.
D. National income minus personal income.

Answer 21

A. Income after taxes have been removed.
Answer (A) is correct.
Disposable income is defined as the income of individuals after taxes have been removed.
(3.2.16)

Question 22

Which of the following actions is the acknowledged preventive measure for a period of deflation?
A Decreasing the money supply.
B Decreasing interest rates.
C Increasing the money supply.
D Increasing interest rates.

Answer 22

C Increasing the money supply.
This answer is correct.
Deflation is a decrease in the general price level. Its causes and effects are the opposite of those of inflation. The purchasing power of the nation’s currency increases. Thus, increasing the money supply is a preventive measure for deflation because it decreases the purchasing power of a unit of the currency.
View Subunit 3.9 Outline